8 slides with speaker notes (Graduate Level)
You are the CFO of a 400-bed hospital in Texas and having trouble with your bottom line and staying within budget. As part of your continued efforts to train your department directors/ supervisors and board on understanding cost and how it is used in the decision process, you have set up classes to explain major concepts of cost. You will address the following areas in your presentation:
- Explain the concept of management control and how budgeting is used as part of it.
- Describe the concept of zero-base budgeting.
- Explain how benchmarking is performed at the department level.
Expert Solution Preview
Introduction:
As the CFO of a 400-bed hospital in Texas, it is vital to understand the major concepts of cost and how they impact decision-making processes. In order to train department directors/supervisors and board members, classes have been set up to explain the following areas:
1. The concept of management control and how budgeting is used as part of it.
2. The concept of zero-base budgeting.
3. How benchmarking is performed at the department level.
Answer:
1. The concept of management control and how budgeting is used as part of it:
Management control refers to the process of directing and controlling an organization’s resources towards achieving its objectives. Budgeting, on the other hand, is a key component of management control as it allows managers to plan and control the financial resources of an organization.
Budgeting involves setting financial targets for the upcoming period and then monitoring actual performance against these targets. The process of budgeting includes identifying fixed and variable costs, forecasting revenues, and estimating the cash flow.
2. The concept of zero-base budgeting:
Zero-base budgeting is a budgeting process that involves starting from scratch every year and justifying every expense for each department or program. This means that each budget line item is evaluated in terms of its priority and necessity, rather than just being based on historical costs or prior budgets.
This approach is beneficial as it helps to identify areas where resources can be redirected to achieve maximum returns. It also encourages managers to think deeply about their priorities and the tradeoffs between different budget line items.
3. How benchmarking is performed at the department level:
Benchmarking is a process of comparing an organization’s performance with that of industry peers or best-in-class organizations. This helps to identify areas where the organization lags behind and where there is room for improvement.
At the department level, benchmarking can be performed by comparing performance indicators such as revenue per employee, cost per procedure, or patient satisfaction scores with those of other departments in the same organization or with industry benchmarks. This can help to identify areas where the department is doing well and where there is scope for improvement.
Conclusion:
In conclusion, understanding these major concepts of cost is important for hospital administrators, as it enables them to make informed decisions about budgets and resource allocations. By explaining management control, zero-base budgeting, and benchmarking to department directors/supervisors and board members, the hospital can work towards improving its bottom line and staying within budget.
